Is Hewlett-Packard Too Dysfunctional to Be Cheap?


Lacking neither talent nor resources, Hewlett-Packard (NYS: HPQ) is nevertheless a broken company that I believe will underperform the market over the next three years. This isn't just talk; I've backed up my take with a bearish CAPScall.

Why am I so down on this stock? Growth has gone missing. Revenue fell 3% in the second quarter. Non-GAAP earnings per share declined more than 20%. Cash from operations took the biggest hit, falling more than 37%. HP is a shadow of the financial juggernaut it once was.

Management matters
Stewardship is an even bigger concern. Former eBay CEO Meg Whitman may very well prove to be a decent or even good chief executive, but HP's board (find the members here) has been so toxic that there's little chance of meaningful change taking place while the existing group is in control.

Fortune recently examined the dynamics at work at HP in a not-very-surprising feature that explores details most of us already knew, but which are nevertheless troubling:

  • Someone -- presumably on the board -- leaked details of a poor third-quarter report in the spring of 2011, forcing the company to accelerate its earnings announcement.

  • The board backed, and then backed away from, a plan to spin off HP's PC business.

  • Executive Chairman Ray Lane has apparently told employees he's ready to take Whitman's "training wheels off," suggesting that any turnaround plan must first run through him.

But again, this is just a sampling. The point of the Fortune piece is that HP's board has routinely waffled its way to years of incompetent leadership. Lane backed former CEO Leo Apotheker and then didn't. The board backed a tentative plan to spin off the PC division before it backed off.

History repeats itself
And yes, I'm talking about the current board. Not the one that approved a $35 million severance payment for former CEO Mark Hurd, but the one that decided Apotheker wasn't worth his $1.2 million annual salary just 11 months into his reign.

Hurd, meanwhile, has gone on to lead Oracle's (NAS: ORCL) troubled hardware division, which has suffered declining revenues in each of the past two fiscal quarters. HP's legacy is dulling by the day. There's no sign this board has the temerity to help Whitman craft a sustainable strategy.

And no, before you ask, firing 20,000 people doesn't count as a strategy -- not when cost-conscious PC peer Dell (NAS: DELL) has seen its top line also fade under pressure from mobile devices such as the iPad and a growing number of tablets based on Google's Android operating system.

This is my second time betting against HP. The last worked out well in theory, though I didn't mark my pick in my CAPS portfolio. I'm not about to make that mistake again and give up what would have amounted to a 48% gain as of this writing.

I get no joy from this call. Anyone who's ever worked in Silicon Valley (as I have) can tell you there's wide admiration for what HP was and could be. Seeing the titan teeter is like watching an old friend suffer from Alzheimer's. HP has forgotten how to be great, thanks mostly to a talented collection of individuals we call the board of directors but who, as a group, behave like corporate Kardashians for their level of dysfunction.

Peer IBM (NYS: IBM) is boring by contrast, but it also pays a healthy dividend, repurchases shares form time to time, and spends inordinate amounts of its free cash flow on research into breakthroughs, some of which have led to rich licensing agreements or lucrative consulting projects. There's no need to bet on HP when Big Blue offers so much more.

Priced to move
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At the time thisarticle was published Fool contributor Tim Beyers is a member of theMotley Fool Rule Breakersstock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Google and IBM at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.The Motley Fool owns shares of International Business Machines, Oracle, and Google. Motley Fool newsletter services have recommended buying shares of eBay and Google. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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